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Explaining Hyperinflation

This is a post in three sections. First I want to outline my conception of the price level phenomena inflation and deflation. Second, I want to outline my conception of the specific inflationary case of hyperinflation. And third, I want to consider the predictive implications of this.

Inflation & Deflation

What is inflation? There is a vast debate on the matter. Neoclassicists and Keynesians tend to define inflation as a rise in the general level of prices of goods and services in an economy over a period of time.

Prices are reached by voluntary agreement between individuals engaged in exchange. Every transaction is unique, because the circumstance of each transaction is unique. Humans choose to engage in exchange based on the desire to fulfil their own subjective needs and wants. Each individual’s supply of, and demand for goods is different, and continuously changing based on their continuously varying circumstances. This means that the measured phenomena of price level changes are ripples on the pond of human needs and wants. Nonetheless price levels convey extremely significant information — the level at which individuals are prepared to exchange the goods in question. When price levels change, it conveys that the underlying economic fundamentals encoded in human action have changed.

Economists today generally measure inflation in terms of price indices, consisting of the measured price of levels of various goods throughout the economy. Price indices are useful, but as I have demonstrated before they can often leave out important avenues like housing or equities. Any price index that does not take into account prices across the entire economy is not representing the fuller price structure.

Austrians tend to define inflation as any growth in the money supply. This is a useful measure too, but money supply growth tells us about money supply growth; it does not relate that growth in money supply to underlying productivity (or indeed to price level, which is what price indices purport and often fail to do). Each transaction is two-way, meaning that two goods are exchanged. Money is merely one of two goods involved in a transaction. If the money supply increases, but the level of productivity (and thus, supply) increases faster than the money supply, this would place a downward pressure on prices. This effect is visible in many sectors today — for instance in housing where a glut in supply has kept prices lower than their pre-2008 peak, even in spite of huge money supply growth.

So my definition of inflation is a little different to current schools. I define inflation (and deflation) as growth (or shrinkage) in the money supply disproportionate to the economy’s productivity. If money grows faster than productivity, there is inflation. If productivity grows faster than money there is deflation. If money shrinks faster than productivity, there is deflation. If productivity shrinks faster than money, there is inflation.

This is given by the following equation where R is relative inflation, ΔQ is change in productivity, and ΔM is change in the money supply:

R= ΔM-ΔQ

This chart shows relative inflation over the past fifty years. I am using M2 to denote the money supply, and GDP to denote productivity (GDP and M2 are imperfect estimations of both the true money supply, and the true level of productivity. It is possible to use MZMfor the money supply and industrial output for productivity to produce different estimates of the true level of relative inflation):

Inflation and deflation are in my view a multivariate phenomenon with four variables: supply and demand for money, and supply and demand for other goods. This is an important distinction, because it means that I am rejecting Milton Friedman’s definition that inflation is always and only a monetary phenomenon.

Friedman’s definition is based on Irving Fisher’s equation MV=PQ where M is the money supply, P is the price level, Q is the level of production and V is the velocity of money. To me, this is a tenuous relationship, because V is not directly observed but instead inferred from the other three variables. Yet to Friedman, this equation stipulates that changes in the money supply will necessarily lead to changes in the price level, because Friedman assumes the relative stability of velocity and of productivity. Yet the instability of the money velocity in recent years demonstrates empirically that velocity is not a stable figure:

And additionally, changes in the money supply can lead to changes in productivity — and that is true even under a gold or silver standard where a new discovery of gold can lead to a mining-driven boom. MV=PQ is a four-variable equation, and using a four-variable equation to establish causal linear relationships between two variables is tenuous at best.

Through the multivariate lens of relative inflation, we can grasp the underlying dynamics of hyperinflation more fully.

Hyperinflation

I define hyperinflation as an increase in relative inflation of above 50% month-on-month. This can theoretically arise from either a dramatic fall in ΔQ or a dramatic rise in ΔM.

This disparity between naturally-scarce gold which has never been hyperinflated and artificially-scarce fiat currencies which have been hyperinflated multiple times suggests very strongly that the hyperinflation is a function of governments running printing presses. Of course, no government is in the business of intentionally destroying its own credibility. So why would a government end up running the printing presses (ΔM) to oblivion?

Well, the majority of these hyperinflationary episodes were associated with the end of World War II or the breakup of the Soviet Union. Every single case in the list was a time of severe physical shocks, where countries were not producing enough food, or where manufacturing and energy generation were shut down out of political and social turmoil, or where countries were denied access to import markets as in the present Iranian hyperinflation. Increases in money supply occurred without a corresponding increase in productivity — leading to astronomical relative inflation as productivity fell off a cliff, and the money supply simultaneously soared.

Steve Hanke and Nicholas Krus of the Cato Institute note:

Hyperinflation is an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy—to name a few.

So in many cases, the reason may be political expediency. It may seem easier to pay workers, and lenders, and clients of the welfare state in heavily devalued currency than it would be to default on such liabilities — as was the case in the Weimar Republic. Declining to engage in money printing does not make the underlying problems — like a collapse of agriculture, or the loss of a war, or a natural disaster — disappear, so avoiding hyperinflation may be no panacea. Money printing may be a last roll of the dice, the last failed attempt at stabilising a fundamentally rotten situation.

The fact that naturally scarce currencies like gold do not hyperinflate — even in times of extreme economic stress — suggests that the underlying mechanism here is of an extreme exogenous event causing a severe drop in productivity. Governments then run the printing presses attempting to smooth over such problems — for instance in the Weimar Republic when workers in the occupied Ruhr region went on a general strike and the Weimar government continued to print money in order to pay them. While hyperinflation can in theory arise either out of either ΔQ or ΔM, government has no reason to inject a hyper-inflationary volume of money into an economy that still has access to global exports, that still produces sufficient levels of energy and agriculture to support its population, and that still has a functional infrastructure.

This means that the indicators for imminent hyperinflation are not economic so much as they are geopolitical — wars, trade breakdowns, energy crises, socio-political collapse, collapse in production, collapse in agriculture. While all such catastrophes have preexisting economic causes, a bad economic situation will not deteriorate into full-collapse and hyperinflation without a severe intervening physical breakdown.

Predicting Hyperinflation

Hyperinflation is notoriously difficult to predict, because physical breakdowns like an invasion, or the breakup of a currency union, or a trade breakdown are political in nature, and human action is anything but timely or predictable.

However, it is possible to provide a list of factors which can make a nation or community fragile to unexpected collapses in productivity:

Readers are free to speculate as to which nation is currently most fragile to hyperinflation.

However none of these factors alone or together — however severe — are guaranteed to precipitate a shock that leads to the collapse of production or imports.

But if an incident or series of incidents leads to a severe and prolonged drop in productivity, and so long as government accelerates the printing of money to paper over the cracks, hyperinflation is a mathematical inevitability.

The discussion of which variables to use to calculate relative inflation could go on for days. It is a philosophical and semantic discussion. You could use any number of things for productivity, or money supply. I just used ΔM2-ΔGDP because they are the simplest, and widest recognised. ΔCPI-ΔGDP could work too, but would describe a different picture (price trends relative to production, as opposed to money growth relative to production).

I have met Milton, and indeed have spoken one-on-one with him about my concept of panic divergence. Perhaps he was just being gentle with a (presumptuous!) research fellow, but he did seem sympathetic.

Considering inflation is over-far downstream; I prefer to start with money. Following Milton I see this as the relationship between the amounts of currency and of resources; change either disproportionately and a tendency to inflation/deflation results. This can be resisted, and indeed is being resisted vastly more powerfully than ever in history. Fine – so long as the dam holds. But when – not if – it breaks?

The more strongly something is suppressed, the more energy it contains so the greater the potential for catastrophe when the constraint fails. We are flirting with disaster.

While I am not well-educated, an experienced practitioner, or even well-read in economic theory, I judge this post as a sound thesis and an excellent tutorial (see M. Sami above). I have (1) a suggestion (why not “production” as per Fisher quote rather than “productivity” which implies a rate or ratio?); and (2) a question: why use the DIFFERENCE between delta-M and delta-Q rather than the RATIO? [Using deltas (annual change in the chart) of the variables may answer my question — I probably should have done the algebra/calculus first before popping off].

1/ Production and productivity can mean the same thing or very different things. As I noted above to George Dorgan, what exactly constitutes ΔM and ΔQ are a matter of philosophical debate. Fisher used GDP for Q, and I do the same thing.

2/ Ratios don’t work for a number of reasons. 0/0 is problematic. 10/0 and 100/0 yield the same result. 0/10 and 0/100 yield the same result (and you will often have situations where ΔM or ΔQ don’t change). Negative productivity will yield a negative ratio no matter what level the money growth is. Etc, etc. I did all the algebra.

I looked at the industrial output link to the graph of (m2ns – ind output). The graph shows a high relative R in late 2008-2009 because ind output fell so much. Yet, prices of almost everything fell. So, how do you reconcile high R with falling prices? Also, I refer you to financialsense.com and Jim Papuvla’s article on the 3 manifestations of inflation. Thanks for the very interesting article.

Relative inflation is not the same thing as a price index. It just shows what is happening to the money supply relative to productivity. Price tendencies can be very fickle, and can be influenced much more by things like consumer confidence. The huge liquidity injection soon stopped the falling prices, production stabilised and we returned to a more balanced picture.

Although there are many definitions of inflation [commodity, asset, money, credit, etc.], I believe that the manipulation of labor-value in its money-form [inflation/deflation] takes away from the true crime, which is the conversion of labor-value in the first place.

Chipping away at one’s source of real value [labor] is the way the elite become such. Concentrating on inflation [or it’s extreme, hyper-inflation] is like looking at the second world war only through the events which sealed the deal [Hiroshima and Nagasaki].

Hyperinflation seems indicate that the political order has completely broken-down and little else. This is why I do not believe that hyper-inflation is in the cards for the traditional Western countries. This would mean a complete debacle for the elite who pretty much own a great deal of the pie.

It would seem as if it was especially in their interests to avoid hyper-inflation [at all costs]. Despite inflationary pockets here and there, this is a deflationary depression by nearly all measures despite the central banks throwing tens of trillions at this vortex.

And, as an side, I would like to thank John for providing this forum. Although I don’t agree with anybody [even myself], I have great respect for all who contribute to this forum. As we all know [especially those of us who have been waging this battle for decades], it is a lonely existence to fight for what’s right in a world so devoid of support for such.

Thank you again, John, and keep up the great work. It is greatly appreciated!

Imp (of Sep 04 @ 17:23:25) and Aziz: The 1980 U.S. inflation of 18+/- %/year was not “hyper” nor a result of “the political order completely broken down”, but it was destructive and required prompt relief — which, thanks to the politics and Fed of the time, happened. It’s different (worse!) now. Short of “hyperinflation”, what about damage and risk to the “political order”? If inflation goes from 2%/year to 10%-20%, what happens? Would could/would the Fed and Treasury do?

John, anyone: to repeat my question and correct a typo — (If we get inflation) short of “hyperinflation”, what about damage and risk to the “political order”? If inflation goes from 2%/year to 10%-20%, what happens? What could/would the Fed and Treasury do?

Depends on the cause of the inflation. I’d say 10% a year within the next twenty years (or possible much sooner) for the USA is a very likely at some point, and my guess is that it will come out of global trade shocks (e.g. war in the middle east, conflict between China and Japan, various other geopolitical arenas). Established political order will find it hard to cope with this kind of cost-push inflation, in my opinion. You remember Jimmy Carter and oil inflation, right? (I’m too young to remember).

OK, so if this is a deflationary depression going on right now, the Aziz Equation says that means the rate of change in Productivity (Q) is greater than the rate of change in Money Supply (M). We know the Fed is increasing the Money Supply $40B/mo, Do you really think GDP is increasing $40B/mo?

This is a world economic system defined by credit and credit-money, and this is what is disappearing faster?? than the Fed can attempt to re-inflate. The unit value of the bad loans on the books of the commercial banks and the central banks is so staggering that they had to change the entire accounting system, while stealing trillions, and borrowing trillions more to simple keep this bubble going.

Eventually, their ability to do the above will run out, and the move back to equilibrium will ensue [with vigor].

In the meantime, I can appreciate the commodity inflation as I just paid $4.17.9/gal. for regular gas [coastal CA] and was similarly surprised at the food store.

when I traveled to the USA in 1999, and drove around in an old Dodge van for 3 months ($10k in fuel!), with a bad cylinder (It chewed the Gas) I paid on average 1.80-1.10 a gallon. The AUD was half the value now so I paid in my terms $3.60. So if I were to travel to the USA and do the same trip, $4.17 does not seem to bad to me.

But I feel for you Impermanence!

Hmm I better stock up on imported goods before the AUD collapses. Our Reserve Bank (Central Bank) is dropping rates in a feverish attempt to compete with the world wide race (Currency debasement) to the bottom.

“The oil embargo against Iran has worked, assuming one defines “work” as a destruction of the Iranian riall which has fallen 33% in a week, 57% in three months and 75% in a year vs. the US dollar.

On Wednesday, the Tehran bazaar closed in turmoil and police used teargas and batons on demonstrators protesting the currency crisis. […]

Once again note that hyperinflation is essentially a political event. Weimar Germany was triggered by war reparations, Zimbabwe by confiscation of property accompanied by capital flight (including human capital), and Iran by US and European embargoes (a clear act of war).

Those suggesting hyperinflation will hit the US are barking up the wrong tree. For further discussion including a chart of 27 hyperinflation episodes and their causes, please see Hyperinflation Nonsense in Multiple Places.”

One of the “comments” was: “The message from Washington is very clear…..attack the petro-dollar and we’ll attack you!”

I agree. I don’t think this has anything to do with Israel’s fear of being attacked (Iran would be pulverized) nor Iran developing nuclear weapons (the Israelis and the U.S. know exactly what Iran is doing), but it has everything to do with Iran selling oil to China and not using the U.S. dollar for the trade.

This IS a political event, and I feel for the poor average Iranian who is being crushed with inflation.

Re Iran: Is Iran’s theocracy/dictatorship a “political” factor? Are Washington, UK, EU, UN sanctions for the purpose of devaluing their Rial? Are these entities responsible for the plight of Iranian people?

“Was it America’s responsibility to “protect the world” from Gaddafi? Or was it from concern that Gaddafi had planned to introduce a gold dinar as a single African currency, able to rival the euro and the dollar?

Two conferences were held on this; it’s not as if our government was unaware of what Gaddafi was proposing. Gaddafi wanted to sell oil for gold dinars, rather than the dollar, meaning that a country’s wealth would depend on the amount of gold it was sitting on, not the pieces of paper that they traded in. Libya has 144 tons of gold. Coincidence?

This has happened before. In 2000, Saddam Hussein told the world that Iraqi oil would begin to be traded in euros, rather than dollars. I believe that you can remember what happened next…sanctions, and then invasion based on allegations of weapons of mass destruction that did not exist.”

Saddam DID have chemical and biological WMD, and had been working on nuclear weapons. We have plenty of current issues to argue — we do not need to go back to election campaign lies and distortions.

I don’t know what prompted the UK-EU NATO nations to attack Gaddafi, but the Obama administration weighed the election implications for days (as in the Osama bin Laden raid), before playing a supporting role. But do you argue that Libya’s oil exports (or Iraq’s under Saddam) would jeopardize the US$’s dominance?!?! If that interests you, watch China and the Persian Gulf countries who have lots of dollars and oil.

Since most war is now [or perhaps has always been] economic, it would seem likely that destroying Iran’s currency would be a pretty effective weapon in creating an environment more friendly to [essentially] taking control of their oil supply.

From a purely pragmatic p.o.v., if you are as dependent on oil as we seem to be, and you represent the “leading” everything in the world, it would seem pretty easy to justify making the world’s potential oil supply accessible.

These are not bad people who make this happen, but in my mind, people who do what people do when they are in control of institutions of this magnitude. In other words, empires are empires not because of bad people, but because of the size and power that define them.

Of course, the good news is that it is this same size and power that leads to their demise.

Imp (of Sep 04 @ 19:15:13): The U.S.is NOT “dependent” heavily nor for long on middle east oil, though Europe is. Iranian oil IS “accessible”. Where in the world do you get these ideas, especially that the U.S. wants “control” of Iranian oil supply?

I agree wholeheartedly with the sentiments of “impermanence” above. Thank you, Aziz, for the tremendous job you do and for your kind and generous patience. These are difficult subjects. I appreciate the fact that you do not “have to be right”, that you bend. It takes a strong and humble person to do that.

I don’t any any silver or gold for that matter, and to tell you the truth, don’t worry about what happens [on a personal level]. Those who survive horrible times [if that’s what is coming], survive because they have the skills to morph with events.

Gold and silver might look pretty, but they might not be worth much compared to being able to see where you might need to go/what you might need to do. The idea that we can simply purchase our way out of a crisis might on be valid only in Hollywood and/or in the contemporary Western notion that everything in life is for sale.

Hard to imagine a Nazi-type scenario happening. TPTB don’t want to run your life, they just want to steal your labor-value. I would think that if you sat down with a bunch of these elite people that they would tell you that they are no so very happy with the course of events and would like to see things get back to some sort of equilibrium [perhaps 50% for them and 50% for the rest of the world?].

After all, if you had a system that was delivering you golden eggs on a regular basis, and everybody else was reasonable OK with that arrangement, why would they wish to create massive insanity by pushing the world to the brink of [God knows what]. To whose advantage would this be?

Although I am not a betting man, I would say that some major group of elite [perhaps the CIS or some such organization] is going to rein-in these idiot “local” bankers and the politicians will get the message sooner or later.

Nobody really stands to gain from massive chaos at this point. But, you never know.

And BR, you are correct, everybody always has their brain and their labor. Probably not a bad idea to know some basic survival skills [just in case :].

impermanence: You’re basing your deductions on an assumption: ” TPTB don’t want to run your life, they just want to steal your labor-value.”
It seems to me the elite do want control, and ultimately worship, and stealing our labor-value/wealth, is but a means to achieve this multi-generational. satanic, goal.

Money printing is the fuel. Velocity is the flame that burns it all down. Hyperinflation is a lost of confidence in money. Political or economic, some event triggers an acceleration in the velocity of money and the bond fire begins.

John Law did not require an exogenous event to topple his empire of fraud. The fraud just got too big and the jig was up.

Modern finance is a truly disgusting beast. Collateral rehypothecated from my ass litter the balance sheet of all major banks. Nothing exists. All these assets are fiction. Created and dreamed up in funny accounts to please the stupid public while new working dollars from the Fed line their pockets.

The US economy is a fraud of epic proportions. People just have yet to realize it yet. Derivatives are the biggest scam in the world, yet continues because the dollar world would topple without it. All the money is already in place for hyperinflation in the US. All the trillions in money market accounts, and debt, and rehypothecated assets on the banks balance sheet are stuck in paper land waiting to crash onto the physical markets at any moment. So the fraud continues, since as soon as the sheep are even aware of the fraud, the system topples.

All that matters is what spikes velocity. What will cause the collapse in confidence. So it could be exogenous. It could be endogenous. But it will happen, because the fraud is too big to keep stable for another decade of American imperialism.

Lastly, economics and politics are one and the same. Economics is the study of the production and distribution of scarce resources and products. Politics specifically focuses on who decides what to produce and more importantly, how to distribute scarce resources and products. So whether it be geopolitics, or whatever is just semantics. Importance boils down to velocity and what is going to spike velocity.

3blah, the system, even when it is operating at 100% efficiency is a complete fraud, so it’s all relative.

In other words, let’s say each individual was totally honest. This being the case, you would still have a situation where the elite would have half of everything [at least], with their cut of the pie growing more or less directly with technology [productivity].

Hell, a 2% inflation target [alone] is enough to do most of us in.

Systems are designed by the few in the interest of the few. If people realized this, we could minimize the damage institutions foist upon individuals . The American Founding Fathers understood, but somehow this wisdom was lost.

There will always be elite and fraud. The problem is what form of government is set up and what protections are afforded to the people. I like Jesse’s from Jesse’s crossroad cafe chart with Totalitarianism on one side and individual freedom on the other side of a circle. Originally, the constitution afforded the nation guaranteed rights and freedoms while the state had enumerated powers. This basically said that the political power to produce and distribute the known resources of the country rests not in government but in the private citizens. The federal government could not overstep its authority and had only limited enumerated powers. However that changed with several Supreme Court cases that gave them implied powers (McCulloch) and the commerce clause (Gibbons v Ogden). Now at the this point we have completely moved towards the totalitarian.

Saying that all systems are bad and all non-systems good is childish. We always need some form of system. Laws protecting property rights are systems. Regulations to prevent monopolies and ensure public safety in food and drugs are systems. It is the form of the system that is important. When regulators commonly and openly leave their jobs to join those they are regulating is a common practice, then you have a problem with the system.

Our founding fathers were “elites.” They owned the vast majority of the land in the country. Wealth disparity has existed throughout human history and you won’t change that. Systems have also existed since the dawn of civilization because civilization itself is a system.

Ultimately this is just another cycle of how systems start and eventually die due to corruption and greed. But to say that it is the system that should be abolished because its always 100% fraud is absurd.

“But to say that it is the system that should be abolished because its always 100% fraud is absurd.”

I didn’t say the system should be abolished, but I will maintain that all systems are fraud, by design, and by their very nature.

Individuals use systems to their own ends [naturally]. Therefore, the more power that systems accumulate, the more power [wealth] goes to select individuals. You can see this correlation.

3b, you believe you can design a system that works well. I believe they are all the same, limited only by their size [proportional to their destructive tendencies]. Whether you call your system, x, y, or z, they are all [essentially] the same. We are talking about human beings and human nature.

It’s the difference between those who believe that the individual is paramount v. those who believe that a system is necessary to control individual behavior. We are in a period of time where institutions control individuals; religion, government, science, education, what-have-you, but, the key for individual freedom is to see the impermanent nature of these institutions.

All good is achieved by individuals as all [serious] bad is institutional. Kindness, compassion, and love are human traits non-transferable to institutions, regardless of what Madison Avenue attempts to promulgate.

Sorry i’m not an anarchist. I believe in civilization. And civilization is a system. Systems goes through cycles. Nothing is ever perfect and I don’t advocate a perfect system. I advocate a system that honors individual rights and liberties.

Systems are not fraud. They are a congregation of individuals grouped together to achieve a purported goal. Individual farmers band together to create irrigation systems where one alone could not. As a system develops and matures, power congregates unequally. Yet nothing about a system in and of itself is a fraud. Frauds are perpetuated within the system yes. And fraud is part of the infallibility of man. That is why u need a system to deter fraud.

Your argument basically says that since fraud occurs in any system, that the system is fraud. That is not true. Just as murder occurs in society, does not mean that society is murder. Nor is society war.

Yeah, and I am looking for a gorgeous 35 yo SoCal woman who drinks beer, loves sports, has her own trust fund, isn’t selfish or petty, doesn’t obsess over every f****** thing, let’s me wear T-shirts and flip-flops everywhere, doesn’t need sixty five pairs of shoes, two hundred and fifty tops, five hundred pairs of jeans, nine hundred skirts, three thousand sweaters, a new G** D** Mercedes every other year, sex six times a day, …

That’s about it, (blah)-cubed. The U.S. Constitutional Republic (“…if they can keep it”: Franklin), amendable but not easily or quickly, worked until spoiled selfish citizens and ambitious politicians phased it out to “move towards the totalitarian” as you put it. Even if we the people, led by tea party Libertarians, get another shot after the November elections, it ain’t gonna be easy or sure!

I did. are you daft? civilization is a system. Society is a system. It doesn’t have to be highly organized and structured to be a system. System can range from simple to complex. It is much more complicated then what you term as simply fraud. A bunch of people working together to build an irrigation canal is a system. You seem so intent on a system being a highly complex government like stalin, mao, or some other shit that you are blind to my argument. Hunting and gathering is a system. Group of people going together to achieve a common goal. So hunting and gathering is a fraud too?

Sorry don, I see nothing in Romney nor the Republican party that screams libertarianism. I see a party beholden to same special interest and monied interests as the Democrats. Romney is a product of the financial industry.

“civilization is a system. Society is a system. It doesn’t have to be highly organized and structured to be a system. System can range from simple to complex.”

3b, I understand your attempt to re-define the argument, but, just the same, you get more than two consenting adults in the same space and all Hell breaks loose.

What we were discussing was the individual v. system dynamics. Regardless of the system’s size, it can not achieve what an individual can on multiple levels, the most important being that only an individual can express their true nature.

OOO OOO AAAA AAA. Did that work? Cause rational thought doesn’t seem to penetrate your thick skull. Human being are social creatures. Its a defining characteristic of humanity.

You have no argument yet keep sputtering your nonsense how all society is a fraud. Do you know the definition of a fraud? Yet all society is the definition of a fraud? of course it is in that dim head of yours. So i’m resigned to let stupidity lie where stupidity lie.

If I was going to create a pseudoscientific and oversimplified equation to describe fragility to hyperinflation in countries with free-floating fiat currencies, it would look something like this:

F=1/3(ΔD+I+E)*M

or, in English:

Fragility to hyperinflation = (the average of: 1/ annual change in total credit market debt owed as a percentage of GDP, 2/ percentage of GDP that consists of imports, 3/ percentage of energy consumption that consists of imports) multiplied by an estimation of military threat to the state from a scale of 1 to 0, where 0 is an unassailable hegemon, 0.3 is a strong, well developed country with well-formed political institutions (e.g. Great Britain, France) 0.5 is a middling power, 0.7 is a vassal state, 0.8 is a weak power under heavy sanctions (e.g. Iran), and 1 is a totally destroyed state.

Obviously some states (e.g. Weimar Germany, 2008 Zimbabwe) would produce a value higher than 100%…

And obviously M is a subjective value. Many Americans would give America today a 0, whereas I would give it at best a 0.2… There may, in turn, be more objective ways for measuring M (institutions, military strength, level of civil unrest, etc), but that is another topic. Also, the relevant information to get a clear idea of M may be known to security services, but they may have no interest in releasing it to economists who want to know the prospects of hyperinflation…

Hyperinflation in Weimar Germany is explained by a well read man, present at the time.

“The gradually increasing inflation made the situation even more difficult in those early years. The increasing inflation made it impossible to say that the trade unions gave any financial advantage to their members. From the individal workers point of view, there was no reason to pay dues to the trade union at all. The already existing Marxist unions were near collapse until millions of marks fell into their lap because of the brilliant Ruhr-action of Mr Cuno..

(Author explanation added- Wilhelm Cuno was Chancellor of Germany from 1922-23. He is known for promoting passive resitance, or non-work at mines etc., in the occupied territory against the French after they invaded the Ruhr and for creating hyperinflation in Germany by paying the workers to not work)

“This so called national Reich Chancellor may be titled the saviour of the Marxist-union”

Adolf Hitler, Mein Kampf Uncensored Ford Translation pg.487

So who gave the Weimar Fed Govt. the money to pay people not to work? Was it a loan? Was the money printed out of thin air? The Fed was in existence at the time. We know that the Fed provided emergency funding to international banks in the 2008 collapse.

We can see parallels with Food Stamps and Government Jobs, when the Fed Reserve is monetising the debts of the Government. A trade shock with its main supplier i.e. Middle EAst or China will see massive hyperinflation in the USA.

Buddy Rojek:
Interesting, thanks. I deduce from your comments that any person who is either paid not to work (as in welfare recipients nowadays or the German trade union members of the past that you refer to) _or_ is paid to work in a (often pointless state) non-productive job (often sponsored by govt to soak up the unemployed/unemployable), is adding upwards pressure on inflation, since he is increasing the demand-side of the economy but is contributing nothing to the supply-side of the economy.

Fruit rots on fruit trees in Australia, while people are paid unemployment benefits. Farmers have such trouble finding workers they employ illegals at great risk of fines and prosecution. And you wonder why fruit prices are high!

For every lazy person, someone else pays a price. If everybody pulled their weight, the burden would be shared. Every dollar lost paying higher priced fruit, means someone goes out of business or a business is not viable.

Very thought provoking. The combination of your ideas with Ray Dalio’s thoughts on a beautiful deleveraging would provide a sound basis for US economic policy for at least the next decade.

I recently read another very interesting article identifying productivity’s relationship to education as the major factor in detirmining trends in income inequality (necessary precursor to political and social turmoil?).

Solving for x, assuming full employment and a cap on gov’t spending to GDP, if we could limit money growth to levels of educational achievement, we could achieve “economic nirvanna”.

I can honestly say that I’ve learned more about economics from your blog than from any other source (other blogs, the library, etc.), and it’s posts like this that really shine some light on the subject for me. Thank you.

After reading the comments on both this blog and ZH, I was suprised at how little coverage Asia received. With 60% of the world’s population and much of the world’s manufacturing capacity, Asia will have much to say about what our currencies will be worth in the future.

I don’t have to tell anyone here about the steady flow of manufactoring jobs, technical know-how and infrastructure to the Orient. Infact, the use of wage arbitrage has helped keep Western inflation low and Western profits high. As the Bernanke would say, “Its been a time of great moderation.” But, that “great moderation” has come at a great price to us in the west. Success has made us soft.

We must ask ourselves, “What happens when the Foxconn employee wants the same wage as their western counter part?”

In the above question, I see the beginning of the an inflection point down the road to hyperinflation. With the four major currencies and the countries tied to them (Dollar, Pound, Euro and Yen) all being debased and the countries themselves carrying a debt burden that cannot be paid back, I see no other way out then the printing of money.

Will this lead to high inflation or to hyperinflation? I vote the later. The Asian people will eventually not accept our fiat from thin air for their work. And day by day, we have less and less to offer them in trade.

We in the Western world seem to have forgot what money is and the evils that come from manipulating money. The TPTB seem to ignore that debt pulls demand forward or the printing of money steals the value all the money ever saved. Everytime I conversations about this theme, I remind myself of the fragility of the human mind and think of the famous poem by Shelley,

I met a traveller from an antique land
Who said: Two vast and trunkless legs of stone
Stand in the desert … Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them, and the heart that fed:
And on the pedestal these words appear:
“My name is Ozymandias, king of kings:
Look on my works ye mighty and despair!”
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.

PS I am working on the timing of hyperinflation and one day may even an oz. or two if my forecast is right.

Context is missing from this discussion. If you look at the last 100 years since the Fed was re-established in the U.S., the dollar has lost 95+% of its value. If you analyze the debt situation, one sees that “they” have taken everything not nailed down and left only unpaid bills.

Although the theft has occurred, people are still waiting for the crisis. Hyper-inflation [and this is not to say that anything can’t happen] is a very unlikely outcome because who exactly benefits?

Let say this would happen. OK, so the dollar now becomes worthless and another currency takes it place, the Amero. What then? Are all dollar denominated debts wiped-out? I don’t think so.

What has to happen [eventually] is that there must be a massive write-off of debt in concert with massive bankruptcies. These will be liberating events that will allow the economy to right itself once again.

People almost always fear the cure more than they fear the disease. And, although the sky has already fallen, people are obsessed with looking up instead of ahead.

Invest in Cambodian Burmese Kyat, Vietnamese Dong, or Cambodian Riel. The production of clothing and other low skill value added production is moving to these countries already. (35 years ago, made in china meant cheap clothes and toys) China is becoming expensive for production already. The Chinese worker can jump up and down for higher wages all they want but the reality is global capital and production can move freely now, and the whole world relies on the sweat and aspiration of the poor to keep prices down.

Hyperinflation will only occur if there is a massive trade block resulting in global Just In Time Bottle necks, and production losses. Just like in World War 2, the government will result in rationing and the crackdown on black markets. Savvy hoarders will make a lot of value when they swap essentials for high end consumer goods (Rolex Watches).

Your Shelley is a beautiful way to refresh perspective. Here’s another — quite apropos to your Asia/Western theme: ignorant of Polynesians and many other civilizations, Cortez thought he DISCOVERED the Pacific Ocean!

…….like Stout Cortez when with eagle eyes
He star’d at the Pacific — and all his men
Look’d at each other with a wild surmise —
Silent upon a peak in Darien.
Keats

“””We must ask ourselves, “What happens when the Foxconn employee wants the same wage as their western counter part?” “””

Ah, the answer to that would be: “nothing”. The Foxconn employee has always wanted the same wage as their western counterpart, just as the western counterpart has always wanted a wage much higher than what they currently receive.

But that’s just to point out that you are not writing or thinking clearly.

China has an 8 Trillion dollar economy and 2 Trillion dollars of exports. China is not mostly laboring for western fiat money. China is building up its production. It’s building up the labor force and increasing productivity and the citizens are gaining the ability to buy the things that westerners take for granted.

MV = PQ. In order to get P to rise greatly, it isn’t enough for M and V to rise. You also need to get Q to fall or at least not rise. What exactly is the bottleneck that will prevent Q from rising? It certainly isn’t the supply of labor.

When it comes to “inflation”, I think it’s enough to accept there are two legitimate measures of it: 1) consumer price inflation (CPI) and 2) monetary inflation. The two do not move in lockstep, thus an increase in the latter does not always lead to an increase in the former at the same rate even when drag is taken into account. In fact the former can rise even without any increase in the latter. Also, it’s widely believed (correctly in my view) that virtually every western govt has produced a CPI measurement which is deliberately intended to under-report true consumer inflation. In the UK, the official CPI figures probably only apply to the 18-25 year old generation (the iPod generation), whereas older generations suffer much higher numbers, perhaps up to three times higher. Such is the dishonesty of govt.

On “deflation”, I cannot really understand why central bankers and political elites are apparently so concerned by deflation or disinflation (Mervyn King at the Bank of England virtually described it as an economic fate worse than death a year or two back to justify his money-printing QE habit). Yet when it comes to the computer electronics industry, it has experienced huge reductions in consumer prices for years but remains a very healthy industry. Of course Merv was probably referring to monetary deflation and its effects on debt values, not consumer price deflation.

The CPI methods helps the Government balance the budget. When Pensions are indexed to CPI or average worker earnings increases, but inflation in essentials, food medicine, utility bills, local government taxes (Much much higher than the CPI) the Government gets out of a budget problem by deceit.

Until everybody understands economics, then Politics will be rotten, as Politics and Economics is one and the same!

Yeah, well, I believe in invisible pink unicorns. What you believe doesn’t matter. What you can provide evidence for is a whole ‘nother story. Perhaps you’ld like to provide references for “virtually every western govt has produced CPI measurement which is deliberately intended to under-repot true consumer inflation”. Otherwise, it’s just a hyperbolic fantasy world you’re living in.

Remember MV = PQ. If you’re experiencing deflation, then P dropped. If it’s because production rose, then that’s good inflation like we see in the electronics industry. Otherwise, it’s because MV dropped. Now, we don’t normally see money being pulled out of economies. Which implies that V dropped. That is: buying and selling are greatly diminished. The economy has come to a relative standstill. Companies aren’t selling much and have lower cash flows and need to lay off workers. Laid off workers have lower cash flow and buy less stuff. And so it cycles.

It appears we have two major camps of ‘experts’. One is the political elites who are running our economies and controlling money supply etc. The words ‘inflation/hyperinflation’ rarely pass their lips for fear they might get castigated for money-printing addictions. The other group are investment analysts and economists who operate outside of the governmental circle and always feel free to speak their truth. The latter have been warning for some time about inflation/hyperinflation coming down the track due to money-printing by the former.

And yet, to date, we have not seen it. Am I to assume it’s still on its way? or that the money being printed is not finding its way into the real economy and may never trigger inflation?

Aziz, et al: Some of us are not pondering hypotheticals or writing books — we are worried about our and our chldren’s/grandchildren’s survival! High inflation is a higher-probability risk and is likely to precede any hyperinflation, what’s in the cards or your crystal ball?

John: in your Oct 05 @ 17:57:11 reply to my question about high (< hyper-) inflation, you asked about the 1970's oil embargo and subsequent inflation. Yes, I remember! In the mid-1970s I was persuaded* by oil industry friends to leave the Defense Dept. for a post in a pre-Dept. of Energy (DOE) agency. I witnessed that Washington's oil/gas involvement in both Ford and Carter administrations** was 99% counter-productive! [Later, Pres. Reagan tried to disestablish the DOE, but influential pigs at the pork barrel (especially universities) had acquired too much Congressional support].

I can provide history — especially from my friend Phil, a distinguished career oil/gas expert who was the last and only qualified high government energy official then or since; he was Ford's Treasury Sec. Bill Simon's (a good guy) right-hand man, and went with him for Simon's brief term as head of the proto-DOE, before Carter succeeded Ford. Phil stayed in Washington to retirement — I'm thankful that he didn't die from ulcers!

* I protested that my oil/gas experience was "upstream" (exploration and production) whereas the job involved more downstream; I was told that the guy I would replace once asked if crude price includes the cost of the barrels!

** EVERYONE I met in Washington (jokingly?) cautioned me that anyone caught with any previous experience in energy was disqualified as biased.

On inflation/hyperinflation …this recent article that appeared on ZeroHedge was unusual in that it sought to explain why QE will not lead to inflation. Basically the author (Charles Hugh-Smith of OfTwoMinds blog) asserts that QE is not being fed into the real economy but is being poured down black holes in the banking system, bond markets and elsewhere to prop up asset values.http://files.aracari.warpmail.net/Misc/ZH-why-QE-wont-create-inflation-as-expected.pdf
But there are others who claim that if/when economies do recover, this extra money will trigger inflation/hyperinflation …unless of course the central banks then reduce the money supply in a balancing act.

Having worked in Banking, hyperinflation will only hit hard when supply is cut off for retaliatory purposes. We have global supply chains and overcapacity which is reducing the price of non Agricultural goods. A disruption to supply chains will cause price increase only to INELASTIC goods i.e. medicine or essential food that can not be grown locally or substituted.

Bankers WILL NOT lend unless there is adequate collateral supporting the loan. With global job insecurity I don’t see the general population of people rushing out to buy high end goods (Cars, boats, bigger house etc). Therefore QE will not hit main street, and will SUPPORT asset prices, giving a sense of calm. This is the genius of Bernanke.

I personally see deflation in goods and housing due to inflation in food prices (less discretionary spending power), which will eventually recover like all cyclical seasonal farming issues do.

I see the economy world wide in a Japan type scenario for decades to come. I do see the USD collapsing at the end of the year. The world will move on but the USA will have to get used to a new normal of lower living standards. China will prosper as it realigns with Africa, Eurasia and the Middle East.

As I have mentioned in other posts, the West will only survive offering citizenship to the wealthy in the emerging economies. i.e. duel citizenship with associated forex currency and property value support.

“The genius of Bernanke”. Well yes, to many ordinary onlookers who don’t look at the news behind the news, he is displaying calm. But there’s a growing chorus of people who say he is destroying the capital markets by pumping them up with QE & ZIRP, and is bringing about totalitarian control of free market capitalism and the collapse of the USD as the global reserve currency. Six to 12 months is the timescale I read most often.
I fear the worst is yet to come…

KevinR – “The other group are investment analysts and economists who operate outside of the governmental circle and always feel free to speak their truth.”

The one group of experts (the political elite) provide cheap money to the other group of experts (HIGHLY-LEVERAGED money managers). The political elite talk down inflation (as they are worried people will realize they’re causing it) while the other group make their money by creating FEAR in the minds of people like us, you know, trying to convince us that high inflation or hyperinflation are right around the corner. They’re talking their book because they have a vested interest in seeing prices climb to the moon; they’re already heavily invested themselves.

TRUTH? Prices are being pushed higher right now because there’s a lot of cheap money chasing yield with very little risk. Truth has nothing to do with it.

backwardsevolution:
Thanks, I agree with your explanation. Which means we all need to keep our eyes on what is actually happening, not on what any of the experts claim is happening. See also my link above to a recent ZH article which runs contrary to majority thinking on inflation.

System is not part of all law based societies. we can have a law based culture without a system. British common law was not a system its laws were discovered not formulated. Brehons law in Ireland was not a system and the so called Islamic shariah is not a system, though it could be turned into one if they wanted to.

The problem isn’t that human society is dominated by systems, but instead, that people are mis-led as to the nature of these systems. For example: the corporation. From the beginning, people understood the danger of for-profit corporations, and they were illegal in the U.S. Even non-profit corporations had charters that needed to be renewed q10years.

People understood. Well, somewhere along the line and over the past two centuries, most people forgot, and as the corporate interests began to gain power and wealth, one of their tasks was to disguise the very nature of their form. This long campaign culminated in their ultimate victory, the U.S. Supreme Count deciding that the corporation has the legal rights of an individual [at least in terms of donating to political campaigns].

It is the form of the for-profit corporation that allows massive wealth accumulation and its inevitable corruption of the political system. Societies seems to do better when both wealth and power are reasonable distributed.

All systems work by using the power of the many to influence the behavior of the individual. Some people think this is a good thing. I don’t, but that’s just me. Regardless, the key is in understanding the true nature [and potential down-side] of any group. This way, you can potentially monitor behavior and interrupt virulent self-interest before it destroys community.

While discussing the pros & cons of systems, let’s keep in mind that, in “using the power of the many to influence .. behavior..”, it matters a whole helluva lot (a) WHAT power and (b) WHAT influence on WHAT behavior! For example, Obama’s deploying increasingly centralized power to effect “redistribution” (taking from disfavored to give to favored classes*). And the way to prevent destructive “virulent self-interest” is to protect** individual RIGHTS and LIMIT government POWERS — government being force and monopoly, including power necessary to regulate non-government activity, including and especially “combination in restraint of trade”.

* “Redistribution” is NOT taxation to fund legal government function. Taxation is taking from all for public services for the benefit of all.

** Of course the best protection of people’s rights ever devised is the U.S. Constitution. We used to abide by it.

I think you are too enamoured of your country to be able to asses its developmental form. If you just look at the development of the railways in those early pioneer days you will see that the government was helping corporations to take land.

@impermanence

What you say is true. The corporation makes individuals working within not fully responsible for the consequences of ‘its actions’ (limited liability). The East India Company worked with the British government to govern the empire and The Raj in India. The people involved in government and in the company including the intellectuals (proto think thanks), were the same individuals and if not from the same class. How can these elites be curtailed and prevented from gaining such absolute power in time? Societies generally have competing interests and factions and they generally keep each other in check, however once you get a massive government with little countervailing power to restrict and limit it not ‘by law’ but by other competing power centres and factions we will get what we have now….massive centralized states which are fragile and have few if any counter powers to keep the ruling elites in check. Massive systems and dependent and independent sub systems within each other like Russian Dolls. Can individuals living in modern cities combat this….yes if only they can form real communities where they can by-pass the state and build up their own functioning law, moral characters and moral economic transactions. Use gold and silver coins, have a community leader who will collect 2.5% from those who fall under its obligatory limits and re-distribute it in the community. This is known as Zakaat payments by Muslims….and in fact the laws of the shariah are designed to prevent usury, oligarchy and fraud. If the central state collapsed…it is communities like these that would continue to function and people would naturally abide by their religious laws from their own traditions. Theft, robbery, fraud are wrong to these communities whether there is a State enforcer of laws or not, as such they would continue to obey their laws and as a community defend themselves against those who do not.

With $16T in debt and $200T in unfunded liabilities coming due, what choice will the Feds have? Default is unthinkable, and outright cancellation of promised benefits will leave the rabble in a foul mood. So, further devaluation, accompanied by “tolerably” high inflation, seems to be the only politically feasible option. Or am I oversimplifying?

Default happens all the time. Bankruptcy IS default and is the way capitalism clears out the dead-wood. There no way to avoid it. It’s an essential part of the deal.

The Fed’s 2% inflation target is running [continuous] default.

Governments, corporations, and the elite see the paying of debt as something that you do ONLY if you must. As is in plain view, they spend a great deal of their time scheming to get out of these obligations.

Back to Zak of Oct 07 @ 09:03:49: I would suspect (and you may know) that there was corrupting influence on GOVERNMENT in the “deals” (and in the decision itself?) to contract for rail construction by land rather than money. But didn’t it prove to greatly benefit the people, especially future generations? [Exaggeration for emphasis: we have to entrust public property — land including oil-gas-minerals-parks-etc. — to government But we should imprison lobbyists (bribers) and hang guilty government officials including Congressmen (bribees)].

While many of your overall conclusions are correct, the details you use needs work. Specifically:

1) Inflation is not delta-M – delta-Q. Given MV = PQ, we have P = MV/Q. Inflation/deflation is the change in P, and so the change in MV/Q. One would need to connect some dots to convincingly show that delta(MV/Q) == delta(M)*delta(V)/delta(Q). So: your equation does not take into account velocity; and your equation is subtractive instead of a ratio.

2) You misuse productivity when you mean production. Productivity is production divided by inputs to production — labor and capital. If labor and capital are under-utilized with no other bottlenecks in the economy, an increase in money-supply could provide an increase in production without an increase in productivity.

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